Originally published on Forbes.com.
The timeshare industry and a massive tax scam based on overvaluation. Shocking, shocking. Next thing you know, we’ll find out that there was gambling at Rick’s. Yesterday the Justice Department announced that a federal court in Helena, Montana has permanently barred attorney James Tarpey and two companies he founded – Project Philanthropy Inc (d/b/a Donate for a Cause) and Time Share Closings Inc (d/b/a Resort Closings Inc) from promoting an “allegedly” abusive timeshare donation scheme.
How Much Is That Timeshare In The Window?
Tarpey and the two companies have agreed to the injunction which provides that they are permanently barred from preparing or assisting others in preparing property appraisals that will be used in connection with federal taxes, encouraging or advising others to claim charitable contribution deductions and organizing, selling, marketing or advising with respect to any plan or arrangement regarding charitable contribution deductions claimed on federal tax returns.
The original complaint of the Justice Department gives examples of what was going on. The IRS reviewed a sample of 303 appraisals that defendants prepared for timeshares that were subsequently sold on eBay in 2010. The average appraisal was $11,187 while the average sales price was $383. Results for 2011 and 2012 were similar. There are a couple of specific examples including that of the hapless Customer 1.
C1 purchased a timeshare in Baja California, Sur Mexico for $10,597.50 in 2004. He tired of paying the annual maintenance fee and heard about Donate for a Cause on the radio promising tax deductions. Donate for A Cause took the unit which it sold for $81. C1 was given an appraisal that valued the unit at $8,740 (which the complaint notes is 107 times what it sold for). Resort Closings billed C1 $2,800 in fees.
Poor old C1 didn’t really get much out of this whole thing. His tax savings from the charitable deduction seem close to a wash to the $2,800 paid to Resort Closings. The IRS coming in and disallowing the deduction was really rubbing salt in the would. The complaint goes into some length about how lousy the appraisal was.
All Out In The Open – If You Look
For whatever it is worth, Project Philanthropy made it real clear to the IRS what was going on when it filed its Form 990. In 2012 Project Philanthropy shows contributions coming in of $7,108,519 and “other revenue” is a loss of $6,303606, which comes from loss on sale of inventory. After other expenses include a salary of $46,078 to President Virginia Babcock $387,659 was distributed to operating charities, the largest donation ($66,787) to the American Cancer Society. I really wish that I could have been a fly on the wall for the discussions that ended up with $5,553 going to the National Rifle Association and $6,526 going to National Public Radio. For the most part, the money went to brand name charities representing the sacred trinity of charity – Dire Diseases (especially cancer), Children, and Veterans.
Looking at the big picture in 2012, you could view the whole enterprise as having taken over $1,500,000 in federal income tax benefit of charitable contributions and transformed it into $387,659 in actual money going to charity. But hey, this is the timeshare industry. What do you expect?
That Coffee Is For Closers
My own experience with the timeshare industry is mixed. I bought an interval a long time ago and really don’t regret it even though there is likely little or no resale value. One of the keys is to own in a resort that you are happy to use yourself every couple of years. The places you end up staying when you trade are much nicer than hotel rooms – often more like small apartments. Getting into why I no longer own the interval is TMI.
Now I enjoy being invited to spend three days at a really nice resort for short money. Unlike most normal people I enjoy the required sales presentation. I feel like I am inside Glengarry Glen Ross talking to somebody who just heard Alec Baldwin’s “Always be closing” speech (I’m not giving you a link, because, you know, language. You can find it.) And I sit and listen to somebody who works for a prestigious brand try to sell me something that is worth maybe $4,000 on the secondary market, if that, for $30,000.
And that brings me to the statement that I got from James Tarpey, which explains why he accepted the injunction and how he defends his appraisals.
James Tarpey On The Appraisals
This action was simply about the United States trying to get an injunction against myself and others to stop us from appraising timeshares for charitable donations. Anyone in my position would have settled since it was just a waste of money to run up legal fees to prevent an injunction against something that I haven’t done in four years and had no intention of doing in the future. It is important to note that this settlement does not include any findings of fact or conclusions of law and therefore no finding of any wrongdoing. I adamantly believe that my appraisals were 100 percent correct. They were done in strict accordance with the Uniform Standards of Professional Appraisal Practice.
They were not inflated. This is supported by recent case law: Cypress Condominium Association, Inc. vs Katrina S Scarborough as Property Appraisers, et al. In that case, the Florida court found that consumer-to-consumer sales prices did not represent arms-length transactions and therefore should not be considered in the equation to determine valuation for state tax-assessment purposes. Rather, the court concluded that resort sales prices were a better determining factor of fair market value.
I have not been able to track down that decision, although I did find a complaint with that title. For whatever it is worth Florida’s statute directs appraisers to look to the resale market in valuing timeshare property. If there are not enough resales, they can look at original price but need to knock off marketing, etc. costs, which are presumed to be 50%. And, of course, valuation for property tax purposes would not be determinative for federal income tax purposes.
Statement From Philanthropy Project’s President
Virginia Babcock also had a statement.
The government has alleged, but has not proven in court, a tax scheme involving inflated property appraisals. It is unfortunate, both for our organization, our cherished donors, and our charity partners, that DFC was pulled into this lawsuit unfairly. We are proud to have donated millions of dollars to other charitable organizations over the years. I am proud of the work that DFC has done, and I refused to allow that work to be sidetracked by costly and burdensome litigation. Our Board agreed that this voluntary settlement without any finding or admission of liability was in the best interests of the organization.
For whatever it is worth Donate For A Cause seems to have shifted its emphasis from whatever was going on back in 2012. The website now says
Donate for a Cause is the charitable arm of Timeshare Specialists, Inc. If your timeshare has retained value we’re happy list your week, negotiate a sales price, and transfer your ownership on a commission, so you don’t have to pay anything to get started today. Once the transaction is complete you can choose any cause you would like to support or you can even elect to keep the proceeds yourself. If you choose to donate all or a portion of the proceeds to charity, we’ll even match your contribution dollar for dollar.
That will pretty well tie the number of charitable deductions to the amount that actually goes to charity.
The Problem Is The Industry
When you really look at it, it seems like the timeshare industry is not viable. It exists by selling things to people that can rarely be resold for more than a small fraction of cost and can sometimes be challenging to give away. The industry is supported by its own special tax break 453(l)(2)(B) which turns the business into a natural tax shelter for those on the sell-side. Take a look at the notes in the 10-K of Hilton Worldwide Holdings Inc and you will see that they are borrowing at 1.77% or 2.07% against timeshare notes with rates as high as 20% (average around 11%). Thanks to 453(l), Hilton does not have to recognize its profit on the sale of the timeshares until it collects the note principal.
The timeshare business is so good that Hilton is considering spinning it off to boost shareholder value. That is great. Investors will have a pure-play in a tax-subsidized business that is based on Barnum’s Law. ]Thanks to the Justice Department, though, there will be no tax break for those who regret not knowing what caveat emptor means.
Other Coverage
Joe Kristan, the new dean of the Tax Blogosphere, was all over this with The Tax Fairy doesn’t do timeshares.
Some time-share owners turned to the Tax Fairy, hoping the magical sprite to whom tax miracles are attributed can wave her wand and turn your albatross into a nice tax refund. A U.S. district court in Montana this week ordered her to stop.
Lewis Kendall had a piece in the Bozeman Daily Chronicle. Edward Zuckerman of Talk Media New reported that the judge had ordered the closure of the companies. He must have read a different injunction than I did.